Rule #1: Phil Town on Investing

Retail Getting Hammered. What to Do Now?

There have been some questions from blog readers about what is causing the huge drop in Garmin (GRMN) and Coach (COH).  Here is a quote from a front page article titled "Retailing Chains Caught in a Wave of Bankruptcies" in the New York Times:

“The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.”

Coach and Garmin both sell stuff that people don’t need.  Coach even more so than Garmin...  Well, my daughter would argue that a new Coach purse is a necessity while a GPS device can be replaced by a map and a compass, so there. 

Still, neither makes food, water or air... so in down turns Mr. Market acts like the whole world of retail is ending, and he wants to sell all retail stuff so badly that he begins to dump even the really good ones at lower and lower prices...

Rule #1 Question of the Week: Double-Checking Raw Data from Financial Sites

Q:

On the financial data site that I use to gather my Rule #1 numbers, the TTM EPS number for one of my companies doesn't add up when compared to the 4 individual quarterly numbers that precede it.  What should we do when the numbers reported don't add up?

A:

First we need to realize that there are about 500,000,000 changes going on in some of these financial databases each day.  The data is coming in from data collectors who compile quarterly numbers from SEC filings made by the companies we're researching.  And while the numbers should all be the same from site to site to site (such as Investools, MSN, and Yahoo), sometimes they aren't.  So what to do?

FREE CASH FLOW UPDATE

Marvin Worst noticed that Investools is no longer reporting "Free Cash Flow".  And neither is MSN Money. 

It may be that both sites have discovered that there is no Generally Acceptable Accounting Practice (GAAP) definition for "Free Cash Flow'".  And in fact, we've noted here that each site had a different definition.  MSN subtracted cash spent on buying other businesses.  Investools did not.  So what is the definition of free cash flow?

READING THE TOOLS: WHEN TO GET OUT (JOSB)

David Kirk writes in that he is interested in Joseph Banks Clothiers (JOSB), but is concerned because he noticed that in June there was a big spike in volume along with a 25% crash in the stock overnight after trading.  Anyone who owned JOSB when trading closed that day woke up to a 25% drop in value the next morning.  So the question is how we avoid getting hammered like this and violating Rule #1.

First, it's important to understand that even Rule #1 investors take losses sometimes... which is the reason that we attach so much importance to having a big Margin of Safety price (to reduce these incidents), and why we require a 15% return when determining the price. 

When we get it right we make up for the occasional losses in a big way.  And remember, we use Tools to get out when the Big Guys get out because maybe they smelled smoke and are sneaking out of the theater.

In this particular case, the proper use of the Tools would have avoided even being in the ballpark of the crash in June.  I've attached the Investools chart for JOSB for the last year and boxed the In and Out points on the stock that correspond with Get IN and Get OUT signals from the Tools. 

INVESTOOLS UPDATE

Hi everyone,

Investools is in the process of changing their interface to better highlight the Rule #1 Big Five Numbers, which is great.  But their testers didn't know a good number from a bad one and passed the changes through with some really bad numbers coming up.  That will be fixed ASAP.  They are on it.

 

Also, the ten years of data is all coming back on the site in just a couple of days according to the VP in charge over at Investools. They switched to a more comprehensive data provider to get deeper data -- like book value per share, for example -- and part of the new data set isn't online yet. 

 

Sorry about the hassle, but it's going to be even faster to identify Rule #1 stocks in the future.

RULE #1 QUESTION OF THE WEEK: THE NEW RULE #1 SEARCH

Q: Will the new Investools Rule #1 Search turn up companies that have solid moats?  I thought I saw some commodities in there.

A: Moat, Meaning, Management and Margin of Safety still all need to be evaluated.  The search as defined by Investools is trying to look for consistency.  It's a beginning and gives us a starting point that is interesting to play with.  The businesses that made the cut look quite good -- even the commodity businesses.   (But remember that commodities don't have moats, and therefore don't pass the 4Ms.)

The search results are a starting point, whatever search you use.  The idea is to reduce 14,000 possible businesses to a handful that you can really dig in on.  This search gives us a different pile to dig through than other searches Investools has and is in the direction that we want to go.

INVESTOOLS BUILDS RULE #1 SEARCH

Kudos to Investools for building a Rule #1 search.  Their team did a lot of work to determine how to best use the 700 some data points that they collect on each stock to find wonderful businesses that we can buy at attractive prices.  The main focus of the Rule #1 pre-built search is to find stocks that demonstrate with consistent long term key numbers that they have a solid moat.

 

You can now let the computer do the digging by clicking on Search, then on the left menu click on Strategy Searches.  Click on Rule #1 Search and then scroll to the bottom of the criteria screen and click on "To find stocks in good "moat" please click here."

RETAIL IN FREEFALL: THE IMPORTANCE OF USING THE BIG CHART

This past week some of you took a hit on Chico's.  Here's an email from Tom:

Hello Phil.  I'm sure I'm not the only one to ask you what we could have done to avoid being hit by Chico's.  I've read your book twice, read all the blogs and forums, and I'm pretty sure I did everything by the book by buying into CHS (investopedia), but then found that I got burned without any warning or any way out.

I love your approach.  You have empowered my wife and I to take control of our retirement.  Thanks in advance for your help!

Take care,

Tom

My response:

Hi Tom,

The biggest mistake I see people making is trying to keep buying when the industry is in a free fall.  CHS is in retail and the big guys pulled out of retail, dropping the price of almost everything involved in retail.  That's why you saw Whole Foods, Chicos, Cheesecake, Panera, Chipotle... even Garmin, sliding sliding sliding.

So what do you do? 

First, don't use the quick ten day moving average. 

SEARCHING FOR MOS

I'm seeing that a lot of you are having problems finding a good enough MOS for the wonderful businesses you've found.  This should warn you that the market as a whole is still a bit overpriced and therefore quite capable of going down... as it has been doing lately.  Remember that patience is a virtue for a Rule #1 investor.

Warren Buffett once said that often the best investments that he's made are often the ones he didn't make, so be patient, grasshoppers.  Stay in cash until you are certain that you are buying something
wonderful and on-sale.

WHEN TO GET THE TOOLS

Here's a letter from Jen, who wants to know whether now's the time for her to sign up for professional investing tools.  Read on.

Hi Phil,

I'm a single mother (the real kind --no support, no contact from her dad) of a 4-year old.  I have a good secure 100k professional government job with early retirement (I'm eligible in 2019 -- at age of 50).  But I'm not mediocre.  I give everything plus to what I do.  The catch phrase on my evals is that I am "passionate" about what I do and this is used as a negative against me.

With 100K in student loans and my 150K mortgages, I pretty much spend every dime I make.